What United Airlines Told Investors (In Brief)

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United Airlines held a conference call with investors yesterday to discuss how the airline plans to move forward and how it plans to improve performance. I actually listened to the whole call and, to an outsider like me, it sounded like one huge “mea culpa“.

United hasn’t been doing well compared to its closest competitors and the beginning of the call came over as a series of “we know we really screwed up…sorry!” comments. The next part of the call was where United executives went over a list of measures United is taking to improve financial performance.

The slides that go along with the investor call are copyrighted so I can’t reproduce them here….but here’s a direct link in case anyone is interested (.pdf file)

The Highlights From The Call

There was a good deal of discussion around United’s numbers (especially in the Q&A that followed the statements from the airline’s executives) but I’m just going to pick out the bits of information I heard that may have a direct impact on frequent flyers.

Premium Customers

United executives admit that they’ve lost a large number of premium customers over the past few years and the company is putting this down to the seemingly endless issues resulting from the bungled merger with Continental.

Interestingly, while there was mention of poor customer service and poor overall flight performance, there was no mention of how executives thought the changes to MileagePlus had affected their premium customer numbers.

Presumably, although the online frequent flyer community was vociferous about the changes, the airline doesn’t believe that the changes to MileagePlus led to any significant losses in premium cabin flyers. Flyertalkers will probably disagree!

United is hoping that its new Polaris Business Class seats will help win back premium passengers

The Product

There was one particular phrase used by the airline’s executives that, depending on how you interpret it, may cause a bit of concern in the frequent flyer community. United said that they would be “better aligning the product with customer preferences“.

I really don’t like the sound of that.

When an airline says that it’s doing something as a result of “customer preferences” what they really mean to say is that they’re doing something that they wish customers would prefer…and that’s almost always something that’s good for the airline and not so good for the customer.

United Executives discussed the following:

• More entry level fares – put simply these will be stripped down fares of the sort we’re more used to seeing on low cost carriers

• More bundled products that they can then up sell to customers

The plan appears to be that United will strip out benefits from the lower Economy Class fares and then attempt to sell these benefits back to flyers booking those low cost fares – the airline hopes this tactic will increase revenues by $250m by 2018.

Overall, United expects further segmentation to lead to a $1bn increase in revenue by 2018.

I realise that this isn’t particularly new news but, if you listen to how United executives discuss the introduction of such measures, you get a good feeling of just how core this is to their plans going forward.

This isn’t an experiment. Once here, entry level fares and any other segmentation measures that are introduced will be here to stay.

Another way United plans to align their product with customer preferences is to continue to change the nature of their fleet.

United has been on a mission to reduce the number of smaller aircraft it has and it’s on course to have fewer than 100 50-seat aircraft by 2019…and this is an important part of the airlines strategy to improve its financials:

• Larger aircraft mean more premium seats that the airline plans to up sell to customers….so don’t think that larger premium cabins will improve your upgrade chances.

• Larger aircraft give United an opportunity to use the latest slimline seats to insert more rows and carry more passengers. If you think legroom is bad now just you wait a few years!

United said that it expects a 30% increase in premium cabin seating by 2018 as well as a 20% increase in Economy Plus seating.

This isn’t being done with the best interest of the customer at heart….the airline believes it can monetise those extra seats and generate significant revenue that way.

A further downside (for passengers) that United acknowledged is that the replacement of smaller aircraft with bigger ones will see significant decreases in frequency and the airline’s solution to this appears to be along the lines of “we’ll try to make timings better”.

So, to put United’s plan in a nutshell: Reduce cabin space for passengers and reduce their flight options at the same time. I bet United flyers can’t wait for those joys!

MileagePlus

Very little was said about United’s rewards program but two points stood out:

• The new deal inked with Chase is expected to bring in $300m of additional revenue by 2018

• The airline plans to give customers “greater choice and flexibility” when it comes to redeeming miles for travel.

The point about increased revenue from Chase isn’t new (although it’s interesting to see a figure put to it) but the second point of “greater choice and flexibility” when it comes to using miles for flights is interesting.

The sceptic in me thinks that this may mean that United will be coming up with yet another way to charge more miles for award travel (peak/off peak seasons?) as I can’t see the airline reversing the devaluation trend….but I’m only speculating here.

The airline didn’t expand on this at all so I really don’t have any more information than what I’ve posted but it’s certainly something to keep a look out for.

Bottom Line

There wasn’t that much new news on the investor call but I found the focus on segmentation and the up selling of premium cabin seats and other benefits) interesting. The news on reduced frequencies and increasingly cramped aircraft wasn’t so much interesting as disappointing.

United clearly needs to make significant improvements to how it’s operating as a business before things will turn around and you get an idea of where things lie between the airline and its investors when you hear Oscar Munoz (United Airlines CEO) telling bankers this on the call:

We know we need to re-earn your trust

The issue is, however, that I’m not sure United understand just how much consumer trust they’ve lost over recent years as well. I fully understand the need to get the airline back on to a secure and competitive financial footing but pandering to Wall Street and slashing costs (and passenger benefits and comfort) isn’t necessarily the way to go.

For an airline to do well it needs to have strong operations and a good product (just look at Delta) and United has neither. Reducing frequencies and cramming more passengers in to already cramped environments isn’t going to change that….and that’s what United doesn’t appear to understand.